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[The Resource] It’s about Learning, not Earning: The Use of Interns by Private, For-Profit Employers

June 18, 2018

The Resource is a legal newsletter for employers and human resources professionals.

Summer is right around the corner, and soon a wave of high school and college students will be looking for summer work. Hiring temporary summer interns can be a real benefit to employers. These workers can perform routine administrative tasks, fill in for vacationing employees, provide additional staff for peak seasonal demands and offer a fresh perspective on products, processes and technology. They are also willing to work for lower wages, and, in some limited circumstances, can work for no wages at all. For these workers, a summer intern position can mean on-the-job training and experience that could lead to greater opportunities when they enter the regular workforce.

This issue of The Resource will review the rules governing the hire and employment of interns and the US Department of Labor’s new test for hiring unpaid interns by private, for-profit employers.

UNPAID INTERNS

The general rules under the Fair Labor Standards Act (FLSA) are clear: Anyone who is suffered or permitted to work for an employer must be paid at least minimum wage and receive overtime pay at one and one-half times their regular rate of pay, unless they fall within certain carefully defined exceptions, such as for executive, administrative or professional employees. But what about interns: those entry-level workers hired on a temporary basis to gain job skills and experience in a given field?

In 2010, the US Department of Labor (DOL) issued guidance on this issue in the form of a one page “fact sheet” to define the criteria for allowing private, for-profit employers to engage unpaid interns. This fact sheet was based on a 1947 case, Walling v. Portland Terminal Co., in which the US Supreme Court found that certain railroad trainees, engaged by the railroad in hopes of becoming railroad brakemen, were not employees covered by the FLSA. “Fact Sheet #71” listed the six criteria that the DOL believed must be satisfied for interns to be excluded from the FLSA’s minimum wage and overtime requirements. Most notably, these criteria included the requirement that the employer derive “no immediate advantage” from the intern’s activities. The DOL also took the position that all six criteria must be satisfied for the exception to apply. However, because most employers receive at least some benefit from unpaid interns, the DOL’s rule effectively precluded all private, for-profit businesses from using unpaid interns, except in unusual cases.

The DOL’s position spurred a wave of lawsuits across the country by interns claiming wages and benefits because they had been wrongly classified as “interns” rather than regular, paid employees. Employers paid large sums to settle many of these lawsuits out of fear that satisfying the DOL’s six-factor test would prove impossible. For instance, Condé Nast settled a class action involving 7,500 interns for $5.8 million in 2014, and Saturday Night Live settled a similar lawsuit involving thousands of interns for $6.4 million that same year. Other employers elected to discontinue their internship programs altogether to avoid the threat of litigation.

Despite threats of class and collective actions, the actual test for distinguishing between “interns” and “employees” under the FLSA was never clear. Although the DOL has long promoted its six-part test, its opinion letters and other administrative guidance were inconsistent regarding whether all six criteria must be satisfied. The courts afforded the DOL’s test some deference, but rarely held that all six criteria must be met. Instead, some courts adopted a “totality of the circumstances” or “economic realities” test to determine whether interns were actually employees. Other courts abandoned the DOL’s six-part test altogether, and used a “primary beneficiary” test that looked at which party receives the primary benefit of the internship.

Then in 2015, the Second Circuit, the federal appeals court for the States of Connecticut, New York and Vermont, had the opportunity to address the issue in the case of Glatt v. Fox Searchlight Pictures, Inc. Eric Glatt and Alexander Footman worked for Fox Searchlight Pictures (Fox) as unpaid interns, responsible for numerous administrative and clerical tasks relating to the 2010 film Black Swan. On October 19, 2012, they filed suit in the Southern District of New York against Fox for “unpaid minimum wages and overtime.” This issue was new for the Second Circuit. It had never before grappled with the question of when an unpaid intern is entitled to compensation as an employee under the FLSA.

On June 11, 2013, the District Court granted Glatt and Footman’s motion for summary judgment based on Walling v. Portland Terminal Co. and the Department of Labor (DOL) Fact Sheet #71. The Court rejected the primary beneficiary test as being “subjective,” “unpredictable” and having “little support” in Portland Terminal, finding that the balance of the factors weighed in favor of finding that Glatt and Footman were employees.

On appeal, the Second Circuit vacated the District Court’s summary judgment and, declining to defer to the DOL fact sheet, adopted the primary beneficiary test, holding, that whether interns qualify as “employees” under the FLSA depends on whether they or the company that hired them is the “primary beneficiary” of their relationship. Under this test, an employment relationship is created when the “tangible and intangible benefits provided to the intern” are less “than the intern’s contribution to the employer’s operation.” The test, as set out by the Court, has two central features: First, it focuses on what the intern obtained in exchange for his or her work. Second, it examines the “economic reality” between the two parties. To determine the primary beneficiary, the Second Circuit proposed a “non-exhaustive” list of factors directed at the extent to which the internship is structured to promote the intern’s education. The Court, holding that no individual factor from the list is dispositive, and that all relevant circumstances should be weighed and balanced, remanded the case to the District Court to decide whether Glatt and Footman were employees under the new test.

Other appellate courts followed suit, including the Eleventh Circuit, the federal appellate court for the States of Alabama, Florida and Georgia, and the Ninth Circuit, the federal appeals court for the States of Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington.

The DOL apparently could no longer ignore the trend of these cases. In its updated fact sheet released in early 2018, the DOL cites to the key cases noted above and adopts the Glatt framework verbatim. Consistent with the caselaw, the DOL explicitly states that the primary beneficiary test is flexible “and no single factor is determinative.” As the DOL explains in this informal guidance, “whether an intern or a student is an employee under the FLSA necessarily depends on the unique circumstances of each case.”

The DOL’s “Old Test” under Fact Sheet #71 for determining unpaid internships as well as the new seven factor test are attached to this Newsletter.

PAID INTERNS

Whether to avoid the pitfalls of Fact Sheet #71 or for other reasons, most private, for-profit employers do pay their interns at least minimum wage. The question arises often, however, what if any benefits must be afforded these temporary employees? The answer to this question will depend on the size of the employer, the type of benefit and the benefit plan document, if any.

401(k) plan: The plan can require an employee to complete one year of service (12 months with 1000 or more hours of service) and be at least age 21. However, plans typically let employees join the plan on the date of employment and start making tax deferred contributions immediately unless the plan document excludes a group of employees (such as interns). Interns could be excluded as a class with the proviso that they will be eligible for the plan after they complete one year of service and are at least 21 years old.

Welfare plans other than health plans (such as dental, vision, life and short and long term disability): An intern who meets the definition of “full time employee” under the terms of the plan (usually an employee scheduled to work 30 or more hours per week) must be brought into the plan after satisfying any waiting period specified in the plan. However, the plan could exclude a group of employees (such as hourly employees or interns). The plan provisions will control and may need to be changed if the employer wishes to exclude interns.

Health plans: The Affordable Care Act will determine if groups of employees can be excluded from coverage under the company’s health plan, and the rules are different for employers with less than 50 full time or full time equivalent employees and ones with 50 or more full time or full time equivalent employees. The latter are called “Applicable Large Employers” and are subject to the ACA “play or pay” rules.

Not an Applicable Large Employer: Otherwise eligible employees must be offered health plan coverage within 90 days of date of employment. A one month orientation period can be added to this 90-day waiting period if certain requirements are met. Like other welfare plans, certain groups of employees could be excluded if allowed under the plan provisions. In addition, the carrier of an insured plan may have underwriting rules that need to be met.

Applicable Large Employers: Full time employees (those scheduled to work 30 or more hours per week) must be offered coverage in an affordable and adequate health plan within 90 days of hire date to avoid the ACA “play or pay” penalties.

It is sometimes possible to treat interns (usually summer interns) as variable hour employees and require them (like other variable hour employees) to average 30 or more hours per week during an “initial measurement period” of up to 12 months. If such an employee averages 30 or more hours per week during the initial measurement period, he or she would have to be offered coverage beginning on the first day of the second month following the end of the initial 12-month measurement period. It might be hard for the Company to fit within this rule if the interns are working full time during the whole 12-month measurement period.

For example, if an intern was hired on May 15, 2018, and the initial measurement period was a 12-month period, you would review the intern’s status on May 14, 2019. If he or she averaged 30 or more hours a week for the initial measurement period, coverage would be required by July 1, 2019. This 12-month measurement period might include 9 months during which the intern worked 25 hours and 3 months during which he or she worked 35 hours. As long as the average over the 12-month is less than 30 hours, the intern does not have to be brought into the health plan.

Whether your company decides to hire interns can be somewhat tricky. To be sure that you are following the rules, you may want to consult with your employment and employee benefits counsel for specific appropriate guidance.

OLD DOL TEST

NEW DOL TEST

(1) The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;

(1) The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.

(2) The internship experience is for the benefit of the intern;

(2) The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.

(3) The intern does not displace regular employees, but works under close supervision of existing staff;

(3) The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.

(4) The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;

(4) The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.

(5) The intern is not necessarily entitled to a job at the conclusion of the internship; and

(5) The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.

(6) The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

(6) The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.

(7) The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

NOT LEGAL ADVICE: This publication is not to be considered specific legal advice and should not be relied upon in lieu of advice from an attorney. Each client’s situation is unique, and if you have need for legal advice, you should seek advice from an attorney.